Minneapolis Market Ready to Embrace Shifting Retail Trends

by Kristin Harlow

The Minneapolis retail market ended the second quarter with a vacancy rate of 3.1 percent. The freestanding retail segment (buildings not contained within a shopping center) posted a vacancy rate of 1.8 percent. Over the past year, there has been a pattern of positive absorption in the market. The average quoted asking retail rental rate at the end of the second quarter was $13.94 per square foot. Comparably, a year ago this rate was $13.29 per square foot.

Meanwhile, construction of retail properties has been on an upward climb. Within the past four quarters, 1.2 million square feet of retail space has been built, and there is an additional 892,910 square feet in progress, according to CoStar Group.

Lucas Gaughan, Gaughan Cos.

Lucas Gaughan, Gaughan Cos.

Net absorption continues

Retail net absorption was moderate in Minneapolis in the second quarter of 2017, totaling 484,120 square feet. That’s up from 135,536 square feet of positive absorption in the first quarter and 366,652 square feet in the fourth quarter of 2016. However, these figures are all down from the third quarter of 2016, when 638,183 square feet were positively absorbed in the market.

Several tenants have moved out of large blocks of space in 2017. For example, Sears vacated 125,209 square feet at Riverdale Village; Kmart exited 103,455 square feet at Signal Hills; and Schneiderman’s Furniture vacated 93,517 square feet at 17630 Juniper Path.

Tenants moving into large blocks of space this year include Target taking 152,627 square feet at 18275 Kenrick Ave.; Hobby Lobby leasing 50,019 square feet at Burnhill Plaza; and Whole Foods’ 45,000-square-foot lease at 305-325 Radio Drive, according to CoStar.

A number of large national and regional tenants are seeking to expand their footprint within the northern suburbs of Minneapolis in the coming year. These tenants include Total Wine & More, AutoZone, Fresh Thyme Farmers Market, Hy-Vee, Planet Fitness, Xperience Fitness and Lunds & Byerlys.

Many of these users are beginning to compete for large blocks of space. The fierce level of competition is causing landlords to become more reserved in their selection of future tenants.

New construction abounds

During the second quarter of 2017, 17 buildings totaling 357,401 square feet were completed in the Minneapolis retail market. Some 15 buildings with 127,022 square feet were completed in the first quarter of 2017, 15 buildings totaling 107,203 square feet were completed in the fourth quarter of 2016, and 16 buildings totaling 591,872 square were completed in the third quarter of 2016.

We are beginning to see development and redevelopment of small to mid-size multi-tenant retail centers. The quoted triple-net asking rental rate for new construction typically ranges from $35 to $45 per square foot. We anticipate continued positive absorption of existing product, plus additional ground-up development and redevelopment activity over the next several years. With the continued absorption of existing large blocks of retail space in secondary markets, we expect to see the new development of big-box retail in secondary and tertiary markets within the next several years.

Changing dynamics 

Landlords are slowly, and in some cases reluctantly, adapting to the rapid, dynamic transformation of
office users choosing to locate within retail centers. There is also a growing demand for experiential retail. As online sales continue to dominate the traditional shopping experience, retail space is continually repurposed.

We are seeing noticeable growth in retail entertainment. Companies such as the Big Thrill Factory, an amusement center with three locations in Minnesota, continue to expand and absorb large blocks of retail left behind by former grocery stores and other similar uses.

Mall operators are beginning to install more food, entertainment and service-based businesses. The Mall of America is a primary example of this trend. Over the past few years, the mall has made an intriguing shift away from a tenant roster of traditional storefronts to a widespread mixture of entertainment and food users.

We are excited to see what the future holds for the retail sector in Minneapolis.

— By Lucas Gaughan, Vice President of Commercial Accounts, Gaughan Cos. This article first appeared in the October 2017 issue of Heartland Real Estate Business magazine.

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